Reference no: EM131172033

CASE STUDY ON MR. X

Background information
Mr. X, who is in his mid-50s, is a senior manager with a mid-sized multi-national logistics and supply chain corporation based in Changi. He has a son aged 21 who has recently completed his national service enlistment and is preparing for a 3-year enrolment in a reputable Manchester City university in 6 months' time (estimated annual expenses including fees and lodging for a UK university education outside of London are about SGD 70,000-00 a year). Mrs. X, previously a full-time homemaker when their only child was younger, has just re-entered the labour market, working in the accounts department of a local import-export company.

Current situation
Due to the rapid technological changes and structural challenges faced in the current industry downturn, the firm that Mr. X has been working for has been bought over. The new owners have decided to retrench Mr. X and at the same time to provide him with generous cash benefits of SGD 250,000 due to his long years of service. Together with the availability of CPF (Central Provident Funds) savings amounting to SGD 850,000 which he intends to fully withdraw and personal cash savings of SGD 200,000 in various short term savings and fixed deposits with local banks, Mr. X reckons that he now has liquid funds totalling SGD 1.3 million in cash available for investment to meet his various needs.

Investment proposals
Mr. X is attracted to the proposals made by the following financial professionals:

1. Ms. Angeline, who works as a Senior Marketing Director of a privately held real estate investment, marketing and distribution company called Anson Home Pte. Ltd. (‘AHPL'), proposes that Mr. X invests with AHPL since it is able to give returns of 24 % over a 2 year period. At the end of the first year of investment, an initial 12 % of the invested amount will be paid while the remaining 12 % will be paid to investors together with their invested amounts at the end of the second year.

Just a week ago, Mr. X attended a private dinner presentation held by AHPL at a 5 star hotel at the invitation of Ms. Angeline where he learned of the following:

a. The minimum amount to invest is SGD 50,000. Most of Angeline's clients have invested at least SGD 250,000 to SGD 1 million through her. They prefer such investments due to the relatively short term or tenure, considering that it is only for 2 years, unlike other investment products which may require longer periods of commitment.

b. The invested funds are being used by a very well established German firm for the purpose of acquiring and re-furbishing older heritage buildings approved by the German government for subsequent re-sale to the German public. This German firm has been around for some 10 years and has carried out similar projects successfully (numbering at least 25 in total) all over Germany. This is the main reason why AHPL has tied up and worked with it for the last 8 years in Singapore. Both AHPL and

Angeline are duly registered with the Council of Estate Agents (CEA), and they have every confidence in advising their clients to invest in such projects due to the tremendous past track records.

c. The CEO of AHPL, who is Angeline's boss, had assured the audience at the presentation that there were no currency risks at all for investors since the returns and the funds being invested will be denominated and paid back in SGD. Similarly, investors do not face any real estate risks or uncertainties in the German property market as the investors are not ‘buyers' or ‘owners' of the refurbished heritage buildings.

d. As an added measure to boost investor confidence, the CEO confirmed that AHPL has procured written opinion from a reputable local legal firm that has sighted and verified the original insurance policy of a Lloyd's insurance firm based in London whereby the current specific project that is being promoted for investment has 100 % insurance protection that it will not fail to complete. According to the CEO, investors' rights will be fully protected under the insurance cover.

e. Former investors with AHPL went on stage to give first hand testimonials regarding their investment experiences. Some of them had gone on fact finding field trips to the project sites in Germany to witness for themselves the development of the projects they had previously invested in. All these investors had successfully obtained the returns as promised as well as their invested principal amounts and they intend to make further investments.

As Ms. Angeline is aware of Mr. X's financial situation, she told him that if he were to invest diligently and sufficiently through her recommendation, his son's education needs and his own financial requirements could be more than adequately taken care of. In view of the above and considering that Mr. X has known and trusted Ms. Angeline for more than 12 years, he is keen to take up this proposal to meet his financial goals.

2. Mr. Billy, who works as Senior Vice President in the wealth management department of Everstrong National Bank Ltd. (popularly known by its locally listed name of ‘ENBL'), proposes that Mr. X places his available funds with ENBL in a discretionary investment management account so that it can grow at an average of 7 - 12 % p.a. (this is based on the track records of the bank's performance for similarly managed investment portfolios over the last 25 years).

At a previous meeting with Mr. X, Mr. Billy explained the workings of a discretionary investment account as one in which the investments are specifically tailored, managed and segregated by ENBL for each individual investor. While the experts at ENBL will make all the necessary investment management decisions and provide detailed records and statements with regular reviews, there can be occasions when the clients as investors can give instructions to override the investment decisions, liquidate, withdraw partially or even terminate the account depending on the circumstances.

The funds to be managed by ENBL for Mr. X will be invested in a diversified portfolio comprising traditional asset classes such as local and foreign stocks, bonds and liquid investments in local and foreign currencies. The weightings of the portfolio for Mr. X as suggested by Mr. Billy will be local stocks (65%), bonds (15%), foreign stocks (15%) and cash deposits and equivalents including foreign currencies (5%). Even though ENBL will have full discretionary power to manage the investments on his behalf as it sees fit, the individual asset weightings can be altered to suit Mr. X's requirements. Any of his specific requests such as his desire not to invest in casino, gaming or liquor stocks can also be accommodated if these and any other requests are made known in advance to ENBL.

The minimum amount accepted by ENBL for such a discretionary investment account or service is SGD 750,000. Additional funds accepted by ENBL from the same investor account must be in increments of SGD 100,000 with no upper limit imposed on the amount that it can manage.

Assumptions
The house in Siglap that Mr. X and his family currently live in is fully paid for. He has more than adequate insurance policies to cover his entire family for medical and long term disability and premature death benefits as various policies were purchased years ago when he first started working. Therefore it can be assumed that insurance coverage will not be considered by Mr. X in his current investment decision deliberations. Similarly, Mr. X will not consider any direct real estate investments under the present circumstances.

Note that for the purpose of this case study, Mr. X does not wish to consider placing the funds back with CPF Board or to purchase or invest directly in properties, annuities, listed equities, REITs and mutual funds (unit trusts) from insurance companies, banks, brokers or investment houses or through online internet accounts. There is also no need to consider bank fees, investment management fees, brokerages, commissions and charges, capital gains taxes and income taxes in Mr. X's investment decision-making process.

As for the economic environment in Singapore, you can assume that the interest rate for short to medium term bank deposits is 1 % p.a. while the annual inflation rate in Singapore is about 3 % p.a.

Assignment
Based on your understanding of the investment tools and concepts that you have studied thus far, explain how you can use the same tools and concepts to advise Mr. X on allocating and utilising the investible funds of SGD 1.3 million.

Discuss your recommendation(s) (in 800 - 1,000 words) by considering with whom and how Mr. X should or should not invest the cash he has on hand.

Analyse the relative merits, demerits and risks involved and discuss the potential outcomes if Mr. X were to take up all your recommendations. You can also give additional suggestion(s) and/or alternative(s) where appropriate (after giving due considerations to the various assumptions being outlined above) all of which must be duly supported by sound and detailed arguments.

Additional Guidance Notes

1. In presenting your recommendation(s) to Mr. X, please remember to state the relevant steps involved in arriving at such a conclusion(s). This should include providing details of your analysis in determining Mr. X's various needs, requirements and objectives and how your recommendation(s) meet these criteria.

2. You should demonstrate your understanding of the investment concepts and tools learned (refer to your course Study Guide in case of doubts) in preparing your recommendation(s) with sound reasons and explanations. Consider the following in your write-up:

a. Have you conducted a thorough evaluation of Mr. X's financial health regarding his investment profile, stage of life cycle investing, liquidity needs, risk tolerance, etc. before deciding what his financial objectives should be?

(Please note that mere listing or repeating of Mr. X's circumstances as provided in the case is not the same as profiling. Profiling requires you to analyse and come to conclusions that fit his requirements regarding products, risk tolerance, time horizon for investing, objectives, liquidity needs, etc.)

b. Have you carried out a proper analysis of the proposals and considered the various risk factors or possible alterations in terms of asset allocation and diversification to meet Mr. X's needs as previously analysed by you under 2a above?

c. Have you prepared your recommendations based on your understanding and analysis and showed Mr. X the potential results or consequences of your suggestion(s)?

d. What would be the potential issues or problems faced when Mr. X actually accepts your recommendations? Are there any other mitigating factors or actions that Mr. X can take to reduce the uncertainties or risks if he were to fully accept your recommendations?

3. You can state additional assumptions which are reasonable and appropriate if these help you to further enhance and make sense of your advice to Mr. X.

(Any assumptions made which are not directly given in the case study itself should be relevant, reasonable and properly explained.)

4. Although not compulsory, you are very much encouraged to use graphs, charts and tables, etc. where appropriate to clearly illustrate the various points in your presentation. Bear in mind that such graphical representations not only save on the words you use but also can be an efficient and effective means of communicating your ideas to Mr. X provided that they are relevant, up to date and have clear explanations.

5. You must use proper referencing and citation formats where applicable.